By DAVID NDII

In Summary

If we are going to put ourselves in debt to this extent, we need to be sure we are getting value for money.

The Chinese do not seem to appreciate is that the Kenya State does not have the same command and control power that the Chinese State has.

It seems to me that a new line from Lamu to Thika represents better value for money.

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So far, the raging debate on the proposed standard gauge railway is focusing on dodgy procurement.

There are also questions about the cost although, on the whole, it is not evident that it is grossly overpriced. Many people seem to be under the impression that it is otherwise a good investment. It is not.

Three hundred billion shillings is not loose change. If it proceeds, it will be the biggest loan that we have borrowed to date. It will increase our external debt by close to one third, our debt to GDP ratio by nine percentage points and our interest payments on external debt by 50 per cent.

The annual repayment of the principal amount translates to over Sh600 million per county - you may want to think what your county could do with an extra Sh600 million every year for the next 10 years.

If we are going to put ourselves in debt to this extent, we need to be sure we are getting value for money. Are we?

I have a simple back-of-the-envelope method I use to check whether a project makes commercial sense.

At the very minimum, a commercial project should pay the cost of capital. Let us put the cost of capital at 7.5 per cent per year, about the rate that we can expect to pay on the sovereign bond we are about to float. This means that the project needs to generate a surplus of Sh22.5 to pay for capital.

To generate this kind of surplus, the railway would have to have a turnover of at least Sh120 billion. Assuming that it charges the prevailing tariff of US$1,000 per container, it would need to carry 1.4 million 20-foot containers a year, 4,000 a day. That would take about 48 very long trains every 24 hours. The busiest single line railways in the US, for instance, run 20 trains a day.

What about cargo? The Mombasa port is now handling containers about one million TeUs (twenty feet unit equivalent). That means the new rail would have to enjoy a monopoly of Mombasa port cargo to pay its way. This is probably why the Chinese financiers are asking for guaranteed cargo. But what they do not seem to appreciate is that the Kenya State does not have the same command and control power that the Chinese State has.

One can argue that the cargo volume will grow. That is true. But we are not demolishing the old line. And the new one comes only to Nairobi at first.

It does not make sense to load cargo going beyond Nairobi on the new line only to transship it to the old line that could have carried it from Mombasa in the first place.

TANZANIA'S CENTRAL LINE

More importantly, the region is building competing transit corridors not least our very own LAPSSET. But the most immediate competition is Tanzania’s central line. This line goes from Dar-es-Salaam to Isaka, about 100 km south of Mwanza. It is being extended to Kigali, with a branch line to Musongati in Burundi. At 1,400 km, the distance from Dar to Kigali is 25 per cent shorter than Mombasa to Kigali.

If our Chinese friends make good their pledge to build the mother of all ports at Bagamoyo, Mombasa will have a hard time competing for transit cargo to and from Rwanda and beyond.

The Lamu port, if completed, will also take a chunk of domestic and northbound cargo. And Djibouti is also angling for South Sudan and Ethiopian business as well. No massaging of data, or growling at critics, will make this railway make commercial sense.

The long and short of it is that the railway will be paid for by taxpayers’ money. Our constitution has set out five principles that public finance must fulfill. Two of these are pertinent.

Article 201(c) requires inter-generational equity that is fairness between current and future generations. Article 201(d) requires that public money be used in a prudent and responsible manner. Let us take 201 (d) first.

The fact that the railway cannot pay its way does not mean it is imprudent. It may be that it has huge indirect public benefits which are not captured by the revenues -- what we call in economics positive externalities, are very high.